The Finance Act 2016 has resulted in a whole raft of taxation changes for British businesses and their professional advisors.
Pete Miller, tax expert with The Miller Partnership, looks at the wider implications of the Act’s new anti-avoidance measures and explains what the new legislation might mean for your business.
He also takes a more in-depth look at how the new tax rules will affect stamp duty, Patent Box and Entrepreneurs’ Relief.
HMRC has extended the reach of the transactions in securities rules to counter what it regards as an income tax advantage when you take money out of a company in such a way that you pay capital gains tax at 10% or 20%, instead of income tax on dividends, at up to 38.1%.
This change to TIS – and what it means for insolvency practitioners as well as businesses – was highlighted in our recent newsflash.
From April 6 2016, TIS rules potentially apply if you liquidate a company – which you might do if you have sold the business and don’t need the company any more. If these rules do apply to you, it means HMRC can charge income tax as if on a dividend, instead of on capital gains tax.
HMRC keeps telling us that it does not intend to use these rules in a ‘normal’ liquidation, whatever that is. But we cannot rely on these statements, so we strongly recommend that you ask HMRC for a clearance before your company is liquidated. If you are an adviser, it may well be that your professional indemnity insurers would expect you to apply for these clearances as a matter of course.
Tax law says that HMRC must answer these clearance applications within 30 days and we are very experienced at preparing them, so please give us a call.
Of course, this change means that HMRC is going to have to cope with tens of thousands more new applications. This bureaucratic headache for our already over-stretched Revenue is among the concerns the professional tax community shares in respect of changes implemented by the Finance Act 2016.
The Government’s new Targeted Anti Avoidance Rule (TAAR) is designed to prevent ‘phoenixing’ – the practice where shareholders receive capital distributions on the winding up a company, then run a similar business in some other form. Examples of this would include starting to carry on the same business after winding up your previous one or if you continued to trade through another company.
If you are caught by TAAR, then you may well find that your capital distributions are taxed as dividends at a tax rate of up to 38.1 per cent, rather than as capital gains which may attract entrepreneurs’ relief at much more palatable 10 per cent.
The crux of the new rule is whether you are trying to avoid income tax by phoenixing the business, which only you or your clients can decide.
Crucially, there is no clearance for these new rules, so under self-assessment you and your clients will have to decide whether the new rules apply. This carries the threat of having to pay extra tax and penalties if you get it wrong.
While this is new legislation, we have many years’ experience dealing with these motive-based tests in the tax legislation, so if you’re worried, please call!
Another new rule came into force on June 29 2016 which makes stamp duty chargeable in many situations where you put a holding company on top of an existing company in a share exchange transaction.
However these regulations relating to stamp duty should only be applicable in certain circumstances.
If the new holding company issues shares of the same class and in the same proportions, as it usually will, there should not be a stamp duty charge.
This is because the new rule is intended only to impose a charge where a takeover is intended and stamp duty is otherwise avoided.
But the way the new rule is worded means that it also catches a number of normal commercial transactions, such as certain demergers and sales where stamp duty is payable in the normal way. These are clearly not the intended targets. As a result, there is now a real possibility of double taxation in completely inoffensive transactions.
We have suggested to HMRC that this new rule needs revisiting, so that it targets only the intended transactions and does not impose a double tax charge. Unfortunately, any changes must wait until Parliament returns from its summer recess in September.
If you are relying on this relief, however, please ring or email to see if we can help.
Another tax regime which has been somewhat revised by Finance Act 2016 is Patent Box, the initiative aimed at rewarding and encouraging innovation among UK businesses.
First introduced in April 2013, Patent Box effectively offers Britain’s entrepreneurs a 10 per cent cut in corporation tax on the income they received from their patents. However, for a number of reasons, calculating the relief has become much less straightforward.
Some of the changes to Patent Box have been implemented because of objections from other EU member States (actually, just Germany) and also stem from the international anti-avoidance initiative, the Base Erosion and Profit Shifting (BEPS) project.
Hypothetically businesses paying £100,000 of corporation tax, can, through Patent Box, make savings of around £50,000.
However, as part of the Finance Act 2016, the rules have now been modified to incorporate new ‘nexus’ calculations which link research and development spend directly to patents.
Under the old regime, it was irrelevant who undertook the original research resulting in the patents. But, in order to satisfy the revised rules, Patent Box claimants must now prove that they did the work themselves or paid for it to be done by somebody else.
Patent Box relief under the new regime will often need separate calculations of the profits made by each individual patent or product, which will hugely increase the complexity of the calculations.
These tough new regulations have caused UK entrepreneurial companies to re-evaluate their corporate structures – and I’m sure that all the red tape will have put off some smaller businesses from pursuing Patent Box.
It’s not been made any simpler by the 71 amendments to the draft legislation that were passed by Parliament in June! So we are all still trying to make sense of the detail of the new regime.
In the meantime, businesses who lodged their patent application before July 1 2016, or who already hold a patent, have two years (until June 30 2018) to opt into the old, much less complex, regime, so it is worth making the most of Patent Box’s potential tax benefits.
If you or your clients are exploiting patents that they own or license, call us to see if they can claim the patent box relief.
Although many of the changes implemented by the Finance Act 2016 are indeed onerous, it is not all bad news.
Thanks to the collaborative approach taken by the tax community and HMRC – and following lengthy negotiations – some of the worst excesses of last year’s Finance Act have now been rolled back.
Last year HMRC made a number of changes to Entrepreneurs’ relief in the Finance Act 2015, which, although intended to combat avoidance, were so poorly targeted that many commercial structures were affected.
Under those changes made in the Finance Act 2015, entrepreneurs’ relief was not available for a sale of a business by a sole trader or a partnership to a company owned by a relative.
Thankfully this has now been amended, so that you can sell your business to a relative through a company and still claim entrepreneurs’ relief.
Additionally entrepreneurs’ relief was not available where the trade was carried on as a joint venture or a corporate partnership.
This has since been amended so that the shareholders of the parent or partner company can now claim relief, as long as their interest in the underlying trade is at least 5%.
And, under last year’s rules, the relief for associated disposals was often not available when shares or partnership interests were sold to family members – a particular problem within the farming community. This aspect too has been revised to prevent an inadvertent barrier to family successions.
All of the changes relating to this relief have been backdated to the dates that the original changes were effective. This is an excellent example of HMRC and the tax profession working together to understand each other’s positions and coming up with workable solutions to these problems. It’s a pity that the initial changes were not drawn up in this way, which would have saved a lot of time and trouble on all sides, but all’s well that ends well.
Having been closely involved with the new amendments, we are extremely well placed to help you with your entrepreneurs’ relief questions.
For more information and advice on the Finance Act 2016 and how it affects you, please contact Pete Miller on 0116 208 1020